Actelion: Genzyme-Sanofi Redux?

By Jacob Plieth

A takeover of Switzerland’s Actelion could be just what the doctor ordered for several pharma companies, but the most obvious buyers will be hard-pushed to justify an attractive premium. This could be Genzyme redux.

Amgen has been mooted as an acquirer, but that makes no sense either from a product or a synergies perspective. A European firm such as Bayer or AstraZeneca would be far more likely to extract cost savings, for instance.

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But even then, the resulting premium might not be enough for Actelion. For a buyer with the right product mix, financial clout and a risk appetite to match, look to Japan and a company like Takeda Pharmaceutical, which it recently emerged had cast its eye over Genzyme Corp.

The three European companies most at need of plugging a patent expiry hole in their profits are AstraZeneca, GlaxoSmithKline and Novartis, and all have a presence in hypertension. But GSK has largely rejected big M&A as a growth strategy, and might also face antitrust concerns over Tracleer’s overlap with its own PAH drug, ambrisentan.

Novartis, Actelion’s Swiss neighbor, looks like a logical bet except that it is busy swallowing up Alcon in a diversification strategy to avoid risk. More likely to give AstraZeneca a run for its money in Europe is Bayer, which has an important PAH project in Phase III, riociguat, and could use Actelion to augment its strategy in this field.

But despite the presence of these possible buyers, an acquisition is no easy bet.

Tracleer has five to seven years’ of blockbuster sales before its patents expire first in the U.S. and then in Europe. This near-guaranteed income stream amounts to some CHF42 a share, roughly where Actelion was trading in October just before rumors of a possible takeover started to circulate.

The key unknown factor is Actelion’s pipeline, which, following this year’s failure of its hemorrhage project clazosentan, centers on two Phase III projects: almorexant, partnered with GSK for insomnia, and macitentan for PAH.

And here’s the risk; even the eternally optimistic sell-side analysts forecast only a 30% chance of these projects reaching the market, despite their relatively advanced development status.

What does that mean for Actelion’s valuation?

Try this. Take the revenue forecasts for almorexant and macitentan to 2025, when patents could start to expire. Risk-adjust that 30% and discount it by a WACC of 12.5% and you get an EV of some CHF5 billion. Add current net cash of CHF979 million and synergies – say 10% of revenue – and you get CHF57.8 a share.

That is barely above Actelion’s current share price of CHF56.5. That means any acquirer would need to take a far more bullish view of the pipeline, which seems unlikely at a time when most are being ultra-conservative on valuations.

Admittedly, the model considers R&D expenditure only up to market launch of the two key projects, an unrealistic scenario but one that seems fair given that I’ve also ignored the early-stage pipeline’s possible sales contribution.

If none of the most obvious European buyers can justify a high enough premium to convince Actelion management to sell, that will mean either no bid until more data on almorexant come out next year, or an early bid followed by a protracted game of to-and-fro.

Unless a Japanese buyer such as Takeda can make a knock-out offer we’ll likely find ourselves in Genzyme territory.
This article originally appeared on Dow Jones Investment Banker. To find out more about the service, and gain access to charts that accompany this article, please visit: www.dowjones.com/ib/

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